Business

Austerity Measures, Euro Troubles Hit Britain's Economy

The U.S. economy has been slowly recovering, but economists warn it could plunge back into recession if Congress does not take action to avoid what's become known as the fiscal cliff.

STEVE INSKEEP, HOST:

That is the name that some clever communications specialist gave to the combination of expiring tax cuts - in other words, tax increases - and broad, mandatory spending cuts aimed at reducing the deficit. The two are set to go into effect at the end of the year.

MONTAGNE: To get a sense of the impact of that kind of financial belt-tightening, let's take a look at the experience in Great Britain. Two years ago, that country enacted tough austerity measures. We reached Zanny Minton Beddoes, economics editor of The Economist magazine, to offer a comparison between the U.S. and what's happened in the U.K.

ZANNY MINTON BEDDOES: I think there's no doubt that austerity has sapped the economy. That government capital spending - government investment - has shrunk very sharply, has had a clear input on the economies, has weakened it. Value added tax rose...

MONTAGNE: And that would be a national sales tax - the value of it.

BEDDOES: That would be like a national sales tax. And what I did was push up prices to consumers, thereby meaning that they had less real income. Their income went less far, and so they spent less. But it was not the only factor hitting the U.K. economy. The U.K.'s neighborhood - the eurozone - as you know, has had a really pretty terrible time over the last couple of years, and that's a huge export market for the U.K. So there's a furious argument going on in Britain about whether - what the role was of austerity versus what the role was of other factors, particularly the weakness of the eurozone.

But what seems clear to me is that given that the external environment wasn't, there was a case for slowing the pace of austerity, and that hasn't happened because there's a very, you know, powerful political incentive for the coalition government to keep going because it's become a somewhat theological issue in Britain.

MONTAGNE: When it comes to the U.S., is there any comparison with Great Britain in that Great Britain there was a very clear path. These were more or less unilateral cuts of just about everything.

BEDDOES: There are some interesting parallels. One is, actually, in the recognition that you needed to have something from tax revenues and something from spending cuts. And in the U.K. case, most of the adjustment over five years has come from spending cuts, but some of it's come from tax increases - the value added tax, the former sales tax was raised, top income tax went up - although it's now coming down again, the equivalent of payroll taxes also went up. So Britain did some tax increases but more spending cuts.

In the U.S. thus far, one problem has been that the debate is particularly caricatured. On one side there is a view that you don't need any new tax revenue; that you want to cut tax rates and maybe, you know, do some tax reform, but you certainly don't want any new tax revenue. And on the other side is a view that you really don't want to touch entitlement spending very much - Social Security and Medicare. And then there's also the fact that the underlying budget deficit is still too big and so you need to do something to get back down. And I think most reasonable people in the center - whether it's center left or center right - recognize that to do that you're going to have to have some entitlement reform and you're going to have to have some tax revenue, and the lesson from the U.K. would be that.

MONTAGNE: Let's get back to the fiscal cliff. And it's always spoken of with ominous overtones. Almost like a sort of economic Armageddon. Would it be all bad or are there any positives to it?

BEDDOES: You know, it depends on what happens. If these tax increases that are due to come in at the end of December, and the spending cuts from the sequester, the automatic spending cuts, both happen and stay in place, then that would have a very powerful effect on the economy. But I really don't think that's very likely. I think there are a number of alternatives scenarios. One is that there's some kind of agreement in the lame-duck session of Congress to...

MONTAGNE: So it never happens.

BEDDOES: So it never happens. Or the sequester side, which is the spending side, there's an agreement to put that off. You could see any number of combinations of things that will happen. But I think it's almost impossible for me to believe that either side of Congress and whoever is president will allow this country to be hit by a 5 percent of GDP fiscal wham and allow it to stay in place.